What do you tell your clients when they ask for your advice on what they need to do to stay up to date on sales tax rates, rules and filing changes? Can you share with them a comprehensive strategy placing them in the best possible position to maintain timely and accurate compliance? Below are some tips as to what it takes to stay current in the world of sales tax.
Sales Tax Rate Changes
Sales tax rates change all the time, particularly at the local (e.g., county, city, district) level. The trick is understanding when, for the states in which you are registered, those changes generally happen and how you can most readily find out about them before they become effective.
Mercifully, rate changes typically become effective on the first day of a month. In some states, rate changes can happen in any month, while in others, local rate changes are confined to the beginning of calendar quarters or happen semi-annually on January 1 and July 1. State-level rates usually cannot change without legislation, often providing several months of advanced notice.
For those states where local sales tax is administered by the state department of revenue (DOR), rate changes are often published at a specific spot on the state website. If you know where to look you should be able to find them.
Of course, your approach needs to be different in the handful of states where local taxes are administered directly by the local governments. In those cases, sometimes you need to send an email or pick up the phone to stay current.
You also need to be prepared for the unexpected. Late-breaking or last-second rate changes happen and sometimes you’ll need to react quickly to stay compliant.
Sales Tax Rule Changes
The first step towards getting a handle on tax rules is understanding whether any exemptions or special rates apply to the products and services your client sells today. This requires a careful reading of statutes, regulations and other informal DOR publications. This can also include juridical decisions, private letter rulings and advisory opinions. Sometimes the answer will be clear, but other times companies may need to interpret how the published rules may apply to their particular facts and circumstances.
If you are left with questions, most DORs have a taxpayer support email service or 1-800 number, but be forewarned the individuals may not be experienced tax professionals and the advice they provide is never binding. It's important to gauge whether or not the person on the other side of the line really knows their stuff.
Obtaining your own private letter ruling is also an option, but be ready to wait a while for an answer and prepare for the possibility that the reply may not fully address your questions.
Unfortunately, a tax matrix is not a “set it and forget it” scenario. Tax rules change through new legislation, regulations, letter rulings, publications, etc. In a digital world, it's possible to track legislative and regulatory developments, but it isn't necessarily easy.
Changes to Sales Tax Forms and Sales Tax Exemption Certificates
When compared to staying up-to-date on changing sales tax rates and rules, tracking form changes and exemption certificate changes may seem a little less arduous. Sales tax returns and filing requirements (eg., electronic data interchange specifications and banking information) do change though, and states can reject a filing for not being completed on the correct return form. If you remit with incorrect banking information, your payment doesn't stand a chance of being timely.
Exemption certificates can also change. In many cases, states will accept a customer exemption documented on an older version of the certificate. But you could hit a challenge in a scenario where legislation or regulations have changed the scope of an available customer exemption, such that it no longer applies to a particular customer.
Tools of the Trade
Building a toolbox to stay on top of all of these sales tax changes is going to require an extensive and varied list of tools. A comprehensive approach considers any and all of the following:
- Constant checking of state DOR web pages for any news and announcements regarding rate or rule changes.
- Consistent review of state legislative website for new bills or bills that may have been passed and signed by the governor.
- Search engine (e.g., Google) news alerts, using carefully crafted keywords that shine light on any local sales tax rate and rule changes.
- Website page trackers that will send an alert when new information (e.g., a new rate change, regulation) has been posted to a particular web page.
- Third-party databases (e.g., RIA, CCH, LexisNexis, TaxNotes) or other sources that provide information on sales tax rules, requirements and changes. Third-party information should always be validated against primary sources from the state.
- Cultivated contacts at state DORs. When you find someone who knows what they are talking about, be sure to save their information so you can reach out to them again.
- Professional networks. Nothing can replace bouncing opinions off other sales tax professionals, optimally in the same industry.
- Membership in tax-related professional organizations, such as the Institute for Professionals in Taxation, Association of Computers in Taxation, and Streamlined Sales Tax.
Staying up to date with sales tax fundamentally requires a comprehensive and thoughtful process executed by skilled professionals with tremendous diligence. This is doubly true for growing companies adding new products and services, expanding into new geographies or opening new channels. Having the right partner, possibly including a tax automation provider, can make all the difference.